Budget 2019: Economic growth boosted before fading

May 30 (BusinessDesk) - New
Zealand’s economic growth is initially underpinned by
Finance Minister Grant Robertson’s first “well-being
budget” but that growth is forecast to gradually fade.
Risks - particularly international risks – remain skewed
to the downside.

After an initial pop higher, growth is
now forecast at 2.6 percent on average over the next five
years.

Robertson remained upbeat. “While this is a lower
growth rate than what we have seen in recent years, it is
still well ahead of forecasts for other advanced economies,
including the US, UK and Canada,” said Robertson in his
budget speech. Growth in the 2015 to 2018 period was well
above 3.0 percent.

Treasury forecasts show that growth in
the year to June 2019 is now seen at 2.4 percent rather than
the 2.9 percent forecast in the half year fiscal update as
the “pace of economic expansion has lost some momentum
over the second half of 2018, largely reflecting slower
business investment growth and a continued easing population
growth.”

GDP growth, however, is projected to rise to
3.0 percent in the year the June 2020 “supported by an
increase in government spending, partly reflecting Budget
2019 decisions and stronger investment.”

According to
the Treasury, spending is a cumulative $7.2 billion higher
over the forecast period than indicated in the half year
economic update in December.

Most of this spending
relates to the expansion of new and existing government
services. Government spending lifts to 4.2 percent in the
year to June 2020, contributing 0.8 percentage points to
economic growth in that year.

According to Robertson, the
annual operating allowance in budget 2019 has been increased
from $2.4 billion to $3.8 billion. The operating allowance
for budget 2020 has also increased from $2.4 billion to $3.0
billion. A further $1.7 billion has also been added to the
multi-year capital allowance for future budgets.

Beyond
the year to June 2020, however, GDP growth gradually eases
as the stimulus from higher government spending fades,
population growth declines and monetary conditions tighten,
Treasury said.

It expects the economy to grow 2.8 percent
in the year to June 2021 and to ease to 2.4 percent in the
year to June 2022 and 2.4 percent in the year to June
2023.

Those forecasts are based on the assumption that
migration declines from 50,000 people in the year to June
2018 to 25,000 people in the year to June 2022 and is steady
thereafter.

Net migration is now projected to add 131,000
people over the next four and a half years, which is about
50 percent lower than the prior comparative period, it said.

It notes that slowing population growth is a
countervailing force for economic growth over the period as
the growth in the working-age population accounted for about
two-thirds of GDP growth over the three years to June
2018.

It does expect the labour market to remain tight,
with the unemployment rate to decline to 4.0 percent by June
2020. Beyond 2020, employment growth eases as the stimulus
from higher government spending fades and interest rates
rise. It is seen at 4.3 percent in the year to
2023.

Regarding monetary policy conditions, it forecasts
the 90-day bank bill rate – widely viewed as a proxy for
the official cash rate – to be 1.9 percent in the year to
June 2020 and to lift to 2.3 percent the following year, 2.5
percent in the year to June 2022 and 2.6 percent by the year
to June 2023.

While the forecast track is lower than it
was in December, it still points to rising interest rates
rather than including further rate cuts. The central bank
has indicated that more cuts are possible.

It said the
recent move by the central bank to cut rates to a record low
1.5 percent was done after the forecasts were finalised but
“does not substantially alter the Treasury’s economic
outlook.”

Growth is also supported by higher terms of
trade and Treasury noted “the balance of risks to the
global outlook remains skewed to the downside.” These
include continued trade tensions, a more pronounced slowdown
in the Chinese economy and major adjustments in
international financial markets.

Regarding domestic risks
it said these are more balanced but include uncertainty
around the impact of business confidence on investment, the
extent to which capacity pressures are building and
uncertainty regarding the outlook of house prices, net
migration and productivity growth.

If these risks are
manifested, GDP growth is seen at 2.8 percent in the year to
June 2020 and then at 2.4 percent over the remainder of the
period.

Contact BusinessDesk

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